What’s In Store? with Karly and Chris (Key West)
Guest: Karly Iacono
Topics: Fitness, consumer behavior
Transcript:
Chris Ressa 0:01
This is retail retold the story of how that store ended up in your neighborhood. I’m your host, Chris ReSSA. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC management. Hi everyone. I’m excited to announce on Sunday Night March 6 at 7:30pm I will host a live asked me anything virtual event, I’m going to talk about all things commercial real estate and retail check out retail retold.com/ama. For more details on how to sign up for the event, and submit your questions today. Join me on Sunday March 6 at 7:30pm. Eastern Standard Time. Sign up today at retail retail.com/ama for more information. I hope to see you there. Before jumping into the podcast today, I want to explain a little bit more about the episode you are about to hear. What’s in store is an interactive discussion between Carly Iacono and I where we unpack the latest trends at the intersection of retail and real estate. The show typically airs once a month on LinkedIn live. However this month, we were able to record the show in person in front of a live audience. In this episode, you will hear Carly and I live from the sixth annual cre Best Practices Summit. listen in as we discuss the evolution of consumer preferences, and the top three things not staying at home in 2022. I hope you enjoy this special episode of retail result. Thanks.
Karly Iacono 1:35
Welcome to What’s in store with Carly and Chris. I’m Carly Iacono Senior Vice President at CBRE.
Ressa 1:42
I’m Chris ReSSA, Chief Operating Officer at DLC management.
Iacono 1:46
And we are so excited to be coming to you live from Key West at the sixth annual Best Practices commercial real estate Summit. Before we jump into today’s content, we want to take a few minutes to thank our hosts and sponsors of this great event. The first is stark and stark, stark and Stark is a full service commercial real estate focused real estate advisory firm and they cover everything from litigation to transactions and all your legal needs in between. The second is Langan engineering. langen is a fully integrated environmental and engineering company that works on commercial real estate portfolios, land development and the energy sector. The third is dare commercial services. Dare commercial is a very well respected property service firm in the tri state area that is there for you with everything from snow sweeping to property maintenance, all of your property specific needs. So thank you so much for hosting us for this amazing event. Now for today’s content. We can all agree, Chris, that if anything, the last two years have been full of change. But what the million dollar question really is now is what change is here to stay. And what is really just temporary. So today, we’re going to walk through our top three things that we think are not going to stay at home and look at what we expect to be some significant shifts in consumer behavior moving forward. Take it away with number three.
Ressa 3:21
So the number three one is entertainment. So Carly, you remember in the beginning of the pandemic, everyone’s talking about the death of the movie theater. And you know, we have trampoline parks that are tenants of ours. We have movie theaters. And everyone was calling that you sell all your movie theaters. And the movie theater is going to close in America. Everyone’s going to Netflix and movie theaters are done. As we sit here today, AMC stock is double what it was a year ago. Their sales in the fourth quarter were 1.1 7 billion and a year ago they were 162 million. And I think people are tired of being home and I don’t think entertainments going to stay home. Notwithstanding Netflix. I’m a big believer in the metaverse, but I don’t think you have to go too far. You look watch any of these NFL games. They’re packed right now. restaurant sales are ahead of pre pandemic, notwithstanding the labor challenges that people have. I don’t think entertainment staying at home anymore. I think entertainment is going to be out of the house.
Iacono 4:33
So I can tell you I actually just went to a movie theater for the first time in probably five years, simply because I wanted to get out of the house. And it was absolutely packed. Not a seat empty with Spider Man big movie, right? But I actually went in person when pre pandemic I didn’t. So I adjusted my behavior in exactly the opposite way that everyone’s talking about. And it’s seemed like just based on the attendance at that one theater in Paramus that I wasn’t the only one. So I think you’re right. Yeah.
Ressa 5:07
In 2017, I think the head of real estate for AMC theaters, or the head of real estate analytics came to DLCs offices to do a presentation on the entertainment industry. We actually hired that woman as our head of construction, actually, Stephanie Baldwin. But it was interesting how AMC was looking at the landscape, then they were looking at entertainment from a competition perspective, I thought they were going to talk about how regal was doing, how Cinemark was doing. But they were comparing themselves to a value family oriented oriented thing to do. And they were comping themselves to go into the football game, which obviously it’s much cheaper to go to the movies, they were copying themselves, to going out to a Broadway show and all these things. And I think about today, I don’t know about you, but I have Netflix subscription. I have a Hulu subscription.
Iacono 6:08
Amazon streaming,
Ressa 6:09
Amazon streaming. And the price of in home entertainment is rising. We were talking to people last night who have children who are playing in the metaverse and they want robux and they have to pay for roebucks I think the price of in home entertainment is going through the roof and is only going to get more expensive, which leaves a really good opportunity for out of the house entertainment
Iacono 6:34
pletely agree and I think it’s not just movie theaters, right? It’s all the other uses that you saw that we thought were going to go bankrupt frankly, Sky Zone all of these you know, other trampoline parks, bouncy houses, kids birthday parties. That is all back in full force. And you know, we were talking about the the retail entertainment uses pre pandemic is that’s what every shopping center needed. That’s what every mall needed, right? We were all becoming entertainment focus. And then that went away. And I think we’re coming back around.
Ressa 7:03
Totally, we, we have a top golf. We’re one of the top golf landlords. And it’s in Dallas. And we were like, what’s going to happen here, but they saw a rise in people coming out of the house, corporate events, even corporations want to take people and to do things that aren’t from home when they’re stuck at home. I think this whole notion that entertainments only going to be in the home is overstated, and I think the numbers are showing that people are ready to get back to being entertained out of the house. And you look at this right we have 25 people that have gone on a trip to Key West to learn but also be entertained here. And I think people are done just being stuck at home and you’re going to see more entertainment out of house.
Iacono 7:56
Great. Let’s move on to number two.
Ressa 7:59
Number two is clearly a hot topic especially with one of the major brands in in Home Fitness. But fitness. There was this whole thing that gyms were in trouble. For those landlords who have gyms, that there was a lot of discussion on force majeure, and a lot of lease negotiation. There’s a lot of discussion on force majeure and lease negotiations that were happening in the middle of the pandemic. We’re all seeing what’s going on with peloton right now and the challenges they’re going through.
Iacono 8:32
It’s still on their stock. So very sad. I own a peloton. peloton
Ressa 8:38
and they recently just actually acquired a peloton, but also have many gyms in my shopping centers and believe that fitness is not going to stay home. And for a few reasons. One, we did a little study and it’s about a little over 10 years to have the average fit out your average home gym to as the equivalent of a planet fitness membership for a little over 10 years. So for majority of consumers to have to take 10 years worth of cost and put that in to one payment is a big challenge. And you probably don’t get everything you get at the planet fitness or any gym, to the whole community aspect that’s built we were talking to people last night that that it’s motivational to go to the gym, be in a class be with a trainer and I believe that is going to be a huge part of fitness not staying at home. And then the third thing, I have a gym that’s pretty impressive at my house a long time ago I was competing in CrossFit. I built out this gym yet my wife loves the act of going to the gym. It’s a disconnection from the home, it feels like that she’s going to do something and get that clear headspace. And for those three reasons I, to me, it’s crystal clear that the gym is going to be back and fitness is not staying at home.
Iacono 10:19
I don’t think Home Fitness is going away either. Though, I think you have a few subsets of consumers, you have the high end consumer that will probably do both right, who will have their peloton like we both do. And we’ll have a gym membership. So I think you’re going to have flexible work from home, people who still want to be able to work out both places. But then you’re gonna have that value consumer, like you said, was the cost benefit analysis that I could have this gym membership for 10 years? Before I equate that to the cost of one bike, right? And maybe I don’t want to bike every day. But I want that diversity. So I really think there’s a place for both. It’s not going to be just home. It’s not going to be just at the gym. But I think we’re going to have people trying to support both for flexibility.
Ressa 11:03
Yeah. I think actually, this hybrid work model this work from anywhere this work from home, is actually going to be a catalyst for fitness centers. I did a webinar where I was a moderator. And one of the panelists was an F 45. franchisee, which is a competitor of Orangetheory, if you’re familiar. And I asked them, all the people in the panel, what is one thing operationally that the pandemic has done to change our business and the owner of the 45 franchises, said, it’s very simple. We now have midday classes. We never had midday classes before. But now people are working from home, they can scoot out at lunchtime, get in a workout. And I think the actual hybrid and work from home is going to propel people to work out at the gym, not just at home.
Iacono 12:01
And I wonder we didn’t talk about this. But I wonder how this will adjust the real estate strategy for a lot of these national tenants. Because if that’s true, if it becomes the mid day work out right instead of before work or after work, maybe the locations that they’re selecting Change, right, we might see more of a suburban focus instead of urban locations, their daytime population isn’t as important, or it’s looked at differently,
Ressa 12:25
totally, we’re already seeing retailers look at daytime population differently. Because it’s hard to get your arms around what the daytime population is, I think things like location analytics place or AI credit intel that have the geofencing and location analytics are obviously becoming more prevalent and impactful in decision making for these retailers. So it’s definitely going to be a change in real estate. But I think for a good way.
Iacono 12:57
Absolutely. And I think the key takeaway here is that these tenants are here to stay and that they are going to continue to do well. But there’s still demand. And we’re not all going to mirror peloton and all these online streaming classes that we want to be in person, just how we take those classes where we take them and what they look like might be changing. Totally agree. All right, now two are number one. Or number one drumroll if I had a table to
Ressa 13:24
our number one topic trend that won’t stay at home is convenience. So we live in a world where everyone’s talking about convenience. I recently interviewed the VP of Marketing, Ethan ternovskiy from playstore AI of Pacer. So if you’re not familiar, they’re a location analytics company. And he had an interesting quote, which is were overly obsessed with this idea of convenience. And he says that consumers are we think that they’re always making rational decisions. And they’re not always making decisions based on what their what is the most time efficient thing to do. And we looked today, before we were started the show, and there was a delivery app. And we just looked at a bottle of soda what it would cost to deliver to where we are today. And it was $9.42 Well, in a in a world pre pandemic where 78% of consumers were paycheck to paycheck. That’s pretty unaffordable for most consumers to spend $9.42 to get a bottle of soda delivered. And if anyone saw what Domino’s just did. Domino’s is offering $3 which is a pretty decent sized percentage of their overall check to have come Consumers pick up the pizza at the store versus delivery. Now that’s that is driven. I didn’t think that that is driven from a labor shortage. So they’re cutting out a lot of labor. But I found it fascinating, right? There’s this incentivization of people to go to the store to go to the restaurant. And the reality is I say this all the time, Michael prizeman was the CEO of Everlane, a digitally native brand. What online only brand actually makes money. And Jim Cramer says, Why are you opening stores, and Michael Pressman says, what online only brand is actually profitable. And then he goes, virtually none of them. That’s the dirty little secret, I would challenge anyone in the office to anyone in the, in the audience to tell me one online only brand that doesn’t have any stores is actually profitable, especially one over about $10 million. And I cannot think of many. And if you look and see what is happening with these brands, they’re all opening stores. And there’s a clearly A intersection happening where most retailers cannot deliver to the consumer, and charge no shipping and make money. And most consumers cannot pay for shipping on every product. But those are
Iacono 16:35
two very, very different things. Right? So one, we’re arguing that consumers cannot afford convenience, or aren’t demanding it, right? Yes. Okay. I’m going to touch on that in a minute. And then on the other, we’re saying that the businesses cannot afford it, because it’s not profitable yet. So I don’t think the consumer cares if it’s profitable to the business in most cases, right. So those are very different mindsets. From the consumer standpoint, I’ll share a personal example. Loyal Whole Foods shopper, I absolutely love Whole Foods, the only grocery store I shop at I am like their quintessential perfect customer, right? They recently started charging for delivery. Now, can I pay for Whole Foods delivery? Yes, I can pay for Whole Foods delivery does not change my eating habits. It really would not change my world. But it’s a $10 delivery fee, plus you tip the driver. So I am now paying 17 to $20 for delivery. So for me, that was an inflection point. It’s not can I pay for it? It’s Is this worth it? And it almost seems ridiculous at that point. So I have stopped from that moment. I stopped using it. And now I go to the store. So I’m still shopping there a little irritated about it. But I go to the store. So I think it’s it’s a few different buckets that we’re looking at, we’re looking at consumers that can’t pay $8 for the soda, or who are going to stores because they’re really, really value required, right? That’s their focus and their shopping patterns. And then we’re seeing some consumers like myself saying, this just isn’t necessary, right? I want to get out of the house anyway. And I can work this into my travels. So how do I do that? And then the third thing you mentioned is more on the company standpoint. And that’s, we have to be profitable. So today’s shipping with free returns is just not not practical.
Ressa 18:19
Yeah. And I think there’s this there was this race to everyday shipping. And like two years ago, it was a huge priority of most retailers. And then we saw Timberland, which was interesting. They they know their customer, socially conscious company, and they said, if you take standard delivery and not, and you extend your delivery out versus getting a rush delivery, or whatever it is, we’ll plant a tree in your name. And so what was timberland doing when they’re speaking to they know who their customer is, but to timberland is saying, Listen, there’s these behemoths, Amazon, Walmart, Target Costco, I’m not going to be able to compete in this race. And so how do I end up in a place where I can be profitable, but I don’t have to do delivery in one hour.
Iacono 19:21
So that doesn’t mean I don’t think either of us are saying that the goalposts and the DoorDash. And all of these convenience, focus brands are going away. Right, so when Amazon’s not gonna discontinue two day shipping? I don’t see that happening. Right? Correct. It’s just that convenience doesn’t have to be the focus of every retailer.
Ressa 19:42
Totally. I think that we made this whole push. One of the things we saw a presentation yesterday, and in that presentation, it stated that in q3 of 2021 13% of All retail sales were done online. And it’s been rising. My takeaway from that, and I knew that stat going in was the we were staying at home, we were not allowed to go to the store. Yet only 13% of all retail sales were done online. Still 87% of all retail sales, were done in a brick and mortar store with amazing people going to the store in an environment where we were locked down. And if a pandemic doesn’t force people to use convenience, and that doesn’t force convenience to stay at home, I’m not sure what will. And so I believe we’re online sales will grow. And we will have really cool innovative things to make shopping more convenient. But I believe convenience is not staying at home.
Iacono 20:55
I love that point. Because nobody else is really talking about it. And I completely agree with you. So before we move on, I want to throw in one more, let’s call it you know, bonus of our top things that are not staying at home. And that is returns. Okay. And I think this is an interesting point because it it drives traffic in different ways. So I don’t think from a profitability standpoint, again, for the business and just convenience for the consumer that returns or something we’re going to do from home, we’re not doing them now we go typically right to the UPS store to drop off our Amazon returns where we go to Kohl’s or we go to wherever there’s a whole foods whatever. And then for standard companies, non Amazon, we’re going to the post office or back to UPS, so we’re still going out to do our returns. So right now, I think we’re limited to basically just the companies I just mentioned. But I foresee more brand partnerships for return to drive traffic to retail locations. So who capitalizes on that traffic and where we go to do our returns. And what we do after we drop off the box, I think is really an interesting area to watch for expansion. The reverse
Ressa 22:06
logistics is a huge challenge for retailers, and they are going to force some of this, there’s going to be more incentive incentives for people to return to the store. If anyone’s seen the halo effect that was put out by ICSC, which is the additional purchase that happens when someone buys online and picks up in store, I think we are going to see retailers also create incentives for people to return things to the store versus return them through ups and through the post office. reverse logistics are a huge challenge right now in online and physical retailing. And it doesn’t feel like there’s a light at the end of the tunnel that’s cost effective to deal with it. Especially if oil prices are going to rise and we have inflation like we’re talking about. And I think that’s going to push the consumer back to the store even more than they already are going.
Iacono 23:11
Right now we have those partnerships. And we’ll definitely want to watch who’s coming up next.
Ressa 23:16
Totally. All right. So
Iacono 23:17
those were our top things of what is not staying at home. Now we are going to recap our bold prediction that you probably heard a few weeks ago and are one of our last episodes for 2022. And I think Chris and I are kind of contrarian on this. So let’s recap and then we’re gonna open it up to questions.
Ressa 23:37
So our number one trend prediction for 2022 Was that more online stores would close than physical stores in 2022. So a couple of stats. And we talked about the total retail sales in that 13 or 15% Even 20% You see some stats that 15 20% of all retail sales are ecommerce. What a couple of things are interesting one, if anyone saw the chart that we saw yesterday, the last two quarters, the percentage of E commerce sales to total retail sales have declined as a total of retail saw sales. Yeah,
Iacono 24:26
nobody believes that. I know right? Nobody that’s an amazing statistic. Yeah, that the total percentage of online sales relative to overall retail sales is actually declined. The last few quarters I just that needed to be repeated because yeah, so kind of opposite what we’re hearing in the media every day.
Ressa 24:44
And then I think one of the things that’s fascinating is that there’s about 2.1 online retailers in America. 65% of all online sales are done Buy 10 companies, though, if you think about that 10 companies are dominating all ecommerce sales, yet we have 2.1 million online stores. That math, right. The other 1.9990 stores that are competing for 35% of the available market share and ecommerce to me doesn’t add up. And I think if you go from the premise before that a lot of them that are online only aren’t even profitable. I don’t know how this is sustainable. And where do we go from here? Other than what we’re seeing, which is, last year, we had more physical retailers open and close. And some of these online retailers, which we don’t hear about often are going to close up shop.
Iacono 25:55
And I think it bears clarification that we’re not saying online is going away, or people are gonna stop shopping online, right, obviously, or assess that the the number of stores that are not profitable is so high, that it really is skewed. Right, so we’re gonna see, these big 10 companies still dominate, we’ll see some others kind of rise in the ranks. But overall, we’re gonna see more online stores close than physical stores as companies reprioritize bricks and mortar locations for profitability long term,
Ressa 26:27
totally. We talk about, I say this all the time. Everyone’s like, the purpose of the store needs to be an experience and all these things. And I often say how about the purpose of the store is just the place where we’re profiting, and so we should have more of them. And we don’t hear that enough. And, you know, there was a, I’ve been on the record a lot lately where people are saying that we’re over stored in America, and I keep saying we’re over digitally stored in America. And CBRE actually put out a study that 25% of all retail space in America will be repurposed by 2025, which, as a landlord, I am encouraged by because that’s taking supply off the market of retail space. And you have retailers that need to have stores because it’s more profitable. And where, since we have a shrinking supply, it should create a rising rent environment and a healthier retail real estate marketplace.
Iacono 27:38
We also published another report recently that said that retail rents were in fact already rising. Right? We’re seeing that and that’s a huge win for landlords for property owners and investors. So yeah, maybe not so much for tenants. But okay, we’re all in the investor real estate landlord side here. So it’s good news for us.
Ressa 27:57
Yep. Okay. So that’s what we have for our show for today. Why don’t we open it up for questions? Good audience
Speaker 3 28:07
first, Chris and Carly, thanks for coming down here. Really appreciate you guys doing your show here. One kind of fascinating thing that I was thinking about the other day, Chris had mentioned that, you know, during this, you know, the great resignation, there’s been so much more entrepreneurialship and people opening stores and things and I think you guys did a show on that a couple of weeks ago. With all this entrepreneurship, can you name us one kind of exciting tenant to kind of look out for in 2022, that might just kind of be a little different, a little quirky out there that nobody would have thought of, but with the whole entrepreneurship going on, somebody to watch.
Ressa 28:47
There are a lot of new and exciting tenants for sure. So a couple of things that have been interesting that we’ve done. So this was a very unique one. We had a we just signed a lease with a and I don’t think this is necessarily going to be scaled across America, maybe it will. But we had a at home security company like personal defense that did all online training. Right, where they teach you how to protect your home and an invasion and all this type of stuff. Open up a physical location. They were a digitally only brand opened up a visit and they did all their classes online open up a physical location in one of our shopping centers to train people, which was such a unique destination will use in a shopping center. bringing people to the property I thought was fascinating. We have recently signed some leases with DoorDash which is really interesting. They’re opening up brick and mortar locations. And a bunch more
Iacono 30:00
egaming I think that’s a big one that we’re gonna start seeing more physical locations for. And what I like about egaming is it’s such a wide range of square footage that they are looking for could be 1500 square feet to a huge stadium. So I think the diversity of concepts in that space is something we’re gonna see more and more of. Totally agree. Next question,
Speaker 4 30:25
Bruce and Carly. It’s, it’s pleasure being hosts, or having you host the show here in Key West, we were really impressed and really liked to kind of continue the conversation about e commerce. And Chris, I think you, you and I had a discussion yesterday about the pricing model. So I think your statistic was 10, retailers have 60 or 65% of the market share? When does the consumer start paying for the couch that gets delivered to their house by Wayfair? What what is the model that evolves from here?
Ressa 31:04
Well, what we’ve seen, obviously, from the big retailers that are dominating, that is the subscription, that that whether it’s prime, whether it is shipped from Target, I’m a shipped customer of targets. So that’s clearly been the answer for a lot of these big retailers. I think what we’re seeing from the other online retailers is to get to that is costly and painful. And so they’re looking at other innovative ways to do it. And one of the things that you’re seeing is this hot direct to consumer trend, right, and there, the theory of cutting out the middleman. That’s obviously super compelling right now to a lot of retailers, Nike pivoted from whether it’s online or in their store. They pivoted to have, you know, I think they’ve they’re up to I don’t know what the number is, but a significant increase of direct to consumer, they let go of a lot of their third party retailers, they forced people to the store or their online website to buy, you have Yeti who went, who was like, very low numbers to like more than 50% is direct to consumer. Now, a friend of mine, Simeon Segal, he’s been very forward, he’s an analyst for BMO Capital Advisors, you keep saying that the direct to consumer model isn’t as profitable as the wholesale model. But the theory being if you can control the channel in which your consumer goes to, there’s more margin. And that’s how clearly some are trying to get around this whole, this whole shipping challenge that you’re talking about. Hey, guys,
Speaker 5 33:02
thanks again for being here. My name is Phil Borst, with sconzo Borsen associates where construction management general contracting company really appreciate you doing this and being here with us. I love your topics today. And one thing I want to do something we were sort of talking about one of the presentations yesterday, I’m gonna bring it back to E gaming again, I think you started talking about it. Talking about at home and not at home at home out of the house. I think it covers both worlds. And I just wanted to get both of your opinion, if you don’t mind on where you think it’s going. Because the trend of it and the advertisement money and everything that’s involved in E gaming. It’s growing exponentially. And it’s still carrying both worlds of in house and outhouse. If you don’t mind both of you share your thoughts. It’d be great.
Iacono 33:44
Great question. Thank you, Phil. I think we’ve just scratched the surface. And that’s really the takeaway here. egaming is one part but it kind of rolls into what we were talking about yesterday on the metaverse and all of the the really inner lapping virtual world and physical world, which is what you just touched on. So right now we’re seeing egaming in the form of competitive in person events where hundreds of people depending on the scale of the venue will come 1000s Right and watch people play games. We see smaller footprint uses in shopping centers and suburban areas where people can just go with their friends and rent space. And then we see on the other end of the spectrum, physical retail stores opening locations in the metaverse, which we talked about on our show a few weeks ago. h&m having a beautiful store that’s completely digital. So I think it’s this is a very, very new concept. And we’re at the beginning of the evolution of where we go from here. So right now it’s sort of tokens and you buy stuff for your avatar and it’s you know, e gaming and virtual and it hasn’t quite all crossed over. But I think it’s just a matter of time before you’re walking into a virtual store. You’re clicking on something with your avatar and then it appears at your house in today’s today’s shipping.
Ressa 35:06
Last week, I was at a shopping center we own in Levittown, Pennsylvania. And I went into the Walmart that is at the property, and I was just getting some water and some Advil had a headache. And it was the end of the day. Get to the self checkout cashier, and there’s actually an attendant there. And I’m watching this gentleman. And I said, what do you what do you got there? And he says, I’m watching two guys on Twitch. And for those who don’t know, Twitch is the video game. You know, they go on there, and they watch people play video games, and then it does other things. But it was fascinating, right? That this is not only from a competitive landscape, do people want to do it, people are fascinated enough to watch it like a sporting event. And I think that creates a huge opportunity for entrepreneurs and for real estate owners to create traffic at properties to bring in new, exciting uses. And we talked about the family at the restaurant with four people sitting there at the table, and they’re all on iPads and no one’s interacting, right. We’ve all heard this story before. And I think we’re starting to go to a place where people are saying, rather than romanticize about if it should be that way or not. People are like, how do we this is how it is and how do we monetize that? And seemingly, people are finding ways to do that.
Speaker 6 36:48
Hi, guys. Good morning, Adam Rosen swag axiom Realty. Thanks for hosting the chat and conversation. This is really a question about utilization of existing real estate and how you fill spaces that are now vacant. And we’re seeing more of a trend of you say DoorDash, or a go puff type occupant come in, where they’re not really retail facing tenants. But they do drive traffic in the form of delivery people and occasional storefront visitors. How do you see that working with your existing tenants that want more traffic driving tenants? And how do you value that from a valuation standpoint, when you’re looking at a center to have a non retail tenant occupying a significant chunk of space and composing a significant portion of the rent roll?
Iacono 37:32
That’s a great question valuations? I’ll start with and I think that’s tough. I think we’re we’re still in the early stages of figuring out how we define a shopping center when it has maybe more than 50% of non retail shopping uses. Right? What does that really look like? I think from a investment sales perspective, it will always go back to tenant lease term credit, how stable we think that income stream is, and that will drive the the expected cap rate or return on the property. So even though it may not be your traditional use, if it’s a credit tenant or quality tenant with a long term lease, and we believe their business model is stable, that I think you could could compare that to a similar use from a valuation perspective. So I think it’s going to be more about understanding these companies and less about what that means for overall traffic to the center. Because if you’ve done proof of concept that non retail works, and then another small tenant goes out, well, then you have an idea, right, of how to backfill it. So I think it’s, it’s about consistency and understanding the income flow from from valuations, how that affects the other tenants and what they’re saying about it. I’m gonna give that one to you.
Ressa 38:47
I think that one, I’m excited for the use. Because if I’ve learned anything from these accelerated digitally native brands is they move quickly. And what it looks like today probably won’t be what it looks like five years from now. So I’m not pretending to be certain of what the model is today. Because my gut is whatever that physical footprint is today, it’ll evolve and what they do in that location will evolve because these brands are they move on a, you know, like that, and I think that’ll happen. But I don’t think it’s any different than before. Right? There’s many centers with accountants, offices in them, law offices, doctor offices in them. And this one is actually a use where people are can go and shop the store, maybe not as much as some of the other stores, but potentially there’s more foot traffic some than uses that we’ve had in shopping centers for over 50 years.
Speaker 7 39:48
Carly, thank you so much for your time today. Always such a great conversation. Enjoy the show. Chris, my question goes back to convenience. So as a busy mother A full time working mother of two children, I should certainly have my fair share of online shopping, you know, pre pandemic, I would find myself going to the stores often to not be able to find the right size, the right brand of something that I’m looking for, I feel like that’s only accelerated, you know, with the pandemic. So I’m just curious, your thoughts and maybe any feedback you’ve gotten from retailers of how they’re looking to continue to drive the in store purchase, while mitigating the inconvenience of not being able to find exactly what they’re looking for.
Ressa 40:39
So a couple of things, I start with the overall premise that right now, the convenience model is really, really challenging for retailers to profit. And for majority of consumers, it is unaffordable at the scale at which people want to use it. So that’s the first premise. It might not be for everyone in the audience here on affordable convenience, but for many it is and retailers clearly need to figure it out. Because it’s if you order for online, return three and pay no shipping, that retailers not making money on that. And I see someone looking at the audience, because clearly their wife is doing that. That’s my take on it. But but that that is that doesn’t pencil for anybody. I think that they’re clearly the retailers are clearly making the store more technology focused and digital friendly, to make sure that you’re walking out with a size that works. I think that if you go to one of the things to make it more convenient. Target Home Depot, they have these apps now. And they tell you what aisle, the item is in what where it is in the exact store so that you know and you don’t have to go to the store if they don’t have it. So you’re not making this trip to the store and going oh, I need this. And they know they don’t have it right you go on your phone, you look and at Target, you can see okay combined in the store. And they’ll tell you where it is in the store. You can buy online pick up in store, you can buy it online, they’ll put it in the trunk of your car, or you can get it shipped to your house, depending on what it is and what you want to do. So I think technology clearly in the pandemic has advanced this, I think every retailer is doing it differently. But that’s one that that I think really hits home on the they don’t have the item, which is you can for many retailers see if they have the item and some of them are so advanced, you can see what aisle that item is in. So you know, and you’re not wasting that time going to the store.
Iacono 42:57
I think the the differentiator though, is going to be with a technology piece because every retailer is in Target, right? Every retailer is an Amazon, you don’t go into a clothing store for your kids and say, Oh, it’s an aisle four, right, you’re just looking for the shirt. So if they don’t have it, that’s where the frustration comes in, I share your pain. So I think on a smaller scale, it’s going to be crucial for retailers to be able to offer that free shipping if they don’t have it in store. So my daughter needed a size eight, they only have a 10 and a six, here’s your size eight, it will be there tomorrow. So maybe there’s a little bit of a hit in profit for that one item, hopefully just one that they can’t find in store. But there’s a solution there, you’re in store, you’re looking at it, you’re touching the fabric you’re trying on maybe a different color the same size that you know you need. And then if they can get it to you for free in a short amount of time. I think that would alleviate some of that frustration. It’s not a perfect answer. But
Ressa 43:54
so I think there’s another piece to this, which is this lack of inventory was really good for retailers, one of the biggest challenges retailers had was over buying. And then discounting and this race to the bottom right would happen with the supply chain shortage. We were talking about it and construction. At the end of 2020. There was a lack of inventory, so they didn’t have to discount everything. For the first time they were able to maintain price, which made them more profitable. And so from a business perspective, from the retail perspective, I think I’m hoping that retailers can hold out before inventory continues to rise. And there’s, again a race to the bottom where they’re cutting into margin. Because one person discounts it now everyone has to discount it. That didn’t happen in the end of 2020. They created margin because there was scarcity of product. And so for the retail side of it, there was some benefits to what you saw happening
Speaker 3 45:00
One last one here guys, Tom honor from Stark and stark again really important question What’s been your favorite entertainment venue while down here in Key West
Iacono 45:12
I had to love it Keywest everything. I don’t think we’re gonna go through all of the entertainment that we have all enjoyed this this conference but deep sea fishing was my personal favorite. I know you’re all wondering Wow Really? I wonder how she did. I’m pretty sure I caught the most fish I’m taking that title at nine fish five keepers so no one can dispute that it was pretty exciting trip.
Ressa 45:38
Didn’t make it deep sea fishing. I had a word called but sloppy joes
Iacono 45:44
thank you to all of our hosts slangin Stark and stark their commercial with them. There’s so many skin geoboard we’re really grateful to be here. It’s been an amazing event. Chris and I have really enjoyed it. And thank you all for watching what’s in store. We look forward to seeing you next month.
Ressa 46:00
I’m excited to announce on Sunday Night March 6 at 7:30pm I will host a live Ask Me Anything virtual event. I’m going to talk about all things commercial real estate and retail. Check out retail retold.com/ama. For more details on how to sign up for the event. And submit your questions today. Join me on Sunday March 6 at 7:30pm. Eastern Standard Time. Sign up today at retail retail.com/ama for more information.
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